Thursday, January 2, 2014

Can Housing do the Dennis Rodman type of rebound?

Bregman’s prospects probably will hinge mostly on one person: Janet Yellen.Yellen,
67, who takes over as chairman of the Federal Reserve if the Senate
confirms her in a vote scheduled for next week, will hold significant
sway over the direction of the U.S. housing market in 2014. Following
last year’s jump in prices that rivaled gains during the housing boom,
Yellen will guide the winding down of the Fed’s bond-buying program that
influenced mortgage rates for five years.

If Yellen tapers too
quickly, investors could panic, causing mortgage rates to surge, said
Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago and an
adviser to the Federal Reserve Board. If the new chairwoman goes too
slowly, low rates coupled with an improving economy will cause the
housing market to overheat, Swonk said.

“Mortgage rates will
decide when we buy a house and what kind we can get,” said Bregman, who
has been living in his childhood home in Boca Raton for two years to
save money for a downpayment. “I’m hoping rates don’t spike up another
percentage point, like they did in 2013.”The average fixed rate
on a 30-year mortgage was 4.48% last week, up from 3.35% in early May,
according to Freddie Mac, the government-owned mortgage securitizer.
Interest rates began rising after Fed Chairman Ben Bernanke told
Congress he was preparing to reduce the bond-buying program.

The
success of Bregman and other first-time buyers will largely determine
the strength of the housing market this year, Swonk said. They have
struggled to purchase property because of stiffer mortgage standards
following the housing crash and a weak job market. The unemployment
rate, at 7% as of November, hasn’t been below that figure since 2008.The
share of homes bought by first-timers fell to 28% in November from 30%
at the beginning of 2013, according to the National Association of
Realtors. During the decade ending in 2012, the average was about 40%.

“So
far, first-time buyers have been missing from the housing recovery,”
Swonk said. “They need to come into the market in greater numbers
because they have to buy properties before sellers can move up.”Home
prices probably will rise about 5.3% in 2014, half the pace of 2013,
according to the Realtors association. Sales of existing homes will
total 5.1 million in 2014, matching last year, the trade group predicts.“Whether
any of the housing forecasts are accurate depends on what Janet Yellen
does, and no one really knows what that will be,” said Karl Case,
co-founder of the S&P/Case-Shiller home-price index. “We’ve never
seen an intervention in the market like the Fed has done, so we’ve never
seen an unwinding.”With Bernanke at the helm, the Fed began
purchasing bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae in
January 2009. The Fed’s stated aim was to bolster the housing market by
reducing financing costs. The program has helped to increase the Fed’s
balance sheet to about $4.03 trillion. Mortgage securities make up about
one third of that total, giving the Fed ownership of $1 out of every $7
of U.S. mortgage debt.The Fed announced Dec. 18 that it will
trim its monthly bond purchases to $75 billion from $85 billion while
reaffirming its stance to keep monetary policy “highly accommodative.”Yellen, currently vice chairman of the Fed, was nominated by President Barack Obama in October to lead the central bank after Bernanke’s eight-year run as chairman.“She’ll probably continue on Ben’s path,” Case said.

Yellen
has broken with Bernanke in the past, however. At a 2007 Fed meeting,
Bernanke dismissed the danger posed by rising mortgage defaults, saying
“the economy looks to be healthy.”Yellen, a former University of California at Berkeley professor of economics, voiced the opposite opinion.“The
risk for further significant deterioration in the housing market, with
house prices falling and mortgage delinquencies rising further, causes
me appreciable angst,” she said, according to a transcript.

Yellen
said in her Nov. 14 confirmation hearing that she’ll maintain the
bond-buying program until a “strong recovery” convinces her to end it.
She didn’t provide details on how she might taper the program.Economists
expect the Fed to cut bond purchases in $10 billion incremental moves
until ending the program late in the year, according to the median
estimate in a Dec. 19 Bloomberg News survey of 41 forecasters. The
purchases have shaved as much as 1.2 percentage points off the Treasury
yields that are used as a benchmark for mortgage rates, Bernanke said in
a 2012 speech.

The economy probably will expand by 3% in 2014,
which would be the fastest pace since 2005, according to a Dec. 18
forecast by Fed economists. Last year, the rate was 2.3%, they said.“The
Fed under Yellen will continue to make purchases, but at a lower rate
as the economy improves,” Case said. “If the economy stays on this
growth path, housing will get enough help from an improving labor market
to withstand a reasonable increase in mortgage rates.”Case said there’s a danger of a rate spike if the Fed’s tightening isn’t done correctly.“If that happens, your guess is as good as mine,” Case said.

Bregman, the Florida lawyer, is a motivated homebuyer—he’s planning to get married at the end of May.The
bachelor now sleeps in the same room he had in high school, which is
still decorated with his basketball trophies and a plaque on the door
saying “Adam’s Room.”

“Living with your parents can cramp your
style, but it’s a great way to save for a downpayment on a house,” said
Bregman, who works for McDonald Hopkins LLC in West Palm Beach. “Just
about everyone I know is either living with their parents or living four
to an apartment to try to save some money.”

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